A lack of rain in China threatens to send wheat prices even higher

FEW commodities are impervious to the “China effect”—the upward pressure on prices from rampant demand in the world’s bounciest big economy. Coffee is one: few Chinese drink the stuff. Wheat has been another. China is the world’s biggest producer, remaining largely self-sufficient by growing some 18% of the global harvest. Higher prices have been caused by growing appetites and supply disruptions elsewhere.

Things could be about to change. On February 8th the UN Food and Agriculture Organisation (FAO) warned that a drought in China’s wheat belt could devastate harvests in June. So the country may buy large amounts on global markets. This could be a “game changer” for wheat, says Sudakshina Unnikrishnan of Barclays Capital.

The FAO reported that rain and snowfalls were well below average in eight wheat-growing regions. The local weather bureau claims, a bit implausibly, that if there are no showers soon in Shandong province the drought will be the worst for 200 years. The parching threatens a quarter of the country’s crop.

The worst may not happen. As Kisan Gunjal of the FAO points out, the heavens may yet open in the coming months. China’s government has pledged to divert water to the stricken areas and provide cash for wells. “Weather modification” teams, which apparently helped to keep the Beijing Olympics rain-free, are turning their hand to seeding clouds with chemical-filled artillery shells to encourage downpours.

China has also built up sizeable wheat stocks—60m tonnes, according to America’s Department of Agriculture—since the 2008 food crisis. But it is likely to want to keep these buffers high, particularly after a series of recent disruptions to supply. Drought in Russia, a big supplier, led to an export ban last year. Floods in Australia—linked to the broader La Niña phenomenon, an occasional wobble in the climate which may also be playing a role in China’s drought—have hit the quality of wheat for export.

The International Grains Council estimates world wheat production in 2011 will be 647m tonnes, much lower than in the two years before. If China starts buying, importers may step up efforts to secure wheat and exporters may impose more bans. Dark clouds are gathering, but not the right sort.

(Source: http://www.economist.com/node/18118817?story_id=18118817&fsrc=rss)